I still haven’t run a small business … but the case against regulation is still awfully weak

Yesterday on a panel at the Atlantic magazine’s “High-Growth Business Forum” an audience questioner brought out the “you’ve never run a small business” j’accuse again when I made the argument that today’s still-sluggish recovery was not being held-back by regulatory changes. I won’t rehash the argument here – check out this, this, and this to see why regulation has nothing to do with the poor economic performance since the Great Recession began (well, except for the role of financial deregulation in contributing to the policy non-response to the build-up of the housing bubble).

What was odd, though, were the specific examples of burdensome regulations that were brought up in response to some prodding. Nobody (in a very business-friendly audience and panel) seemed particularly eager to go after any specific financial regulations, health care regulations, or environmental regulations. These are clearly the ones that GOP congressional members have in mind when they scream about “job-killers,” but even this audience didn’t seem interested in arguing specifics on them. I guess it turns out that a stable financial system, fairer health system and clean air and water are all actually pretty popular.

Instead, Brink Lindsey of the Kauffman Foundation fingered zoning regulations and occupational licensing. Fair enough – smartpeople have said that some regulations in these realms seem to be more about rent-seeking than solving market failures. Further, I’m a sucker for arguments that zoning regulations often lead to some very undesirable outcomes. Maybe I just read too much Atrios.

On occupational licensing, though, it’s worth noting first that a group of incumbent business-owners, like many of those in audience, would very likely be against an abandonment of occupational licensing standards – which after all tend to shield incumbents from competitive pressure. And color me cynical, but I’d wager that a policy campaign aimed at reducing occupational licensing will find plenty of rationale for well-paid occupations (doctors, lawyers, accountants) to keep their licensing requirements while dismantling it for lower-paid ones.

Regardless of the specifics, it seems pretty clear that the effect of regulations like these on overall economic growth (as opposed to distribution) is tiny in a macroeconomic perspective. In short, it seems awfully hard to explain the high priority Washington policymakers have put on rolling back proposed regulations based on examples like these (which, by the way, are generally not federal regulations).

And then the anti-regulatory arguments got really silly – with a panel member singling out health inspections at restaurants as overly burdensome and arguing that they were unneeded because restaurants whose food-handling practices make people sick would go out of business as their reputation spread. This seems too obvious to have to say, but apparently it’s not so here goes: it is far from obvious that this “free market” solution is less costly than a regulatory one.

Many regulations are actually about increasing consumer choice by reducing their search costs – seeing a health inspection certificate on a restaurant’s wall is a signal that you don’t have to spend your own precious time researching their record on safety by yourself. And guess what – often just this sort of reasoning turns out to be supported by evidence – a study of a Los Angeles regulation that forced restaurants to display hygiene information to customers led to not just an improvement in restaurant hygiene but also to an increased sensitivity of consumers to differences in restaurant hygiene. In short, it offered information not previously available to consumers and this information led them to make different (and presumably better for them) choices. Oh, and it also led to a sharp drop in hospitalizations related to food-borne illnesses.

So, I still haven’t run a business – but broad-brush jeremiads against the regulatory burden stifling the U.S. economy still don’t really have much of a case.

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